CASE NO.

5 (MIDTERM PERIOD)
G.R NO. 51765

Questions Answers

1.Who were the contending parties or ● Republic Planters Bank, petitioner

persons in the case?
vs

● Hon. Enrique A Agana. SR., as Presiding Judge

● Robes-Francisco Realty & Development Corporation and Adalia F.
Robes, respondents

2. What are the important facts in the On September 8, 1961, private respondent Corporation secured a loan from
said case that are also related to the petitioner in the amount of P120,000.00.
topics in the above-mentioned
PowerPoint? As part of the proceeds of the loan, preferred shares of stocks were issued to
private respondent Corporation, through its officers then, private respondent
Adalia F. Robes and one Carlos F. Robes.
- Ibig sabihin, instead na buong P120,000 (legal tender) ang
ibibigay ay naging partially in the form of money and stock
certificates (stock certificates numbered 3204 and 3205, each for 400
shares with a par value of P10.00 per share, or for P4,000.00 each, for
a total of P8,000.00.)

Said stock certificates were in the name of private respondent Adalia F.

Robes and Carlos F. Robes, who subsequently, however, endorsed his
shares in favor of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions:

The Preferred Stock shall have the following rights, preferences, qualifications
and limitations, to wit:

1. Of the right to receive a quarterly dividend of One Per Centum (1%),

cumulative and participating.
2. That such preferred shares may be redeemed, by the system of
drawing lots, at any time after two (2) years from the date of issue at
the option of the Corporation.

On January 31, 1979, private respondents proceeded against petitioner and

filed a Complaint anchored on private respondents' alleged rights to collect
dividends under the preferred shares in question and to have petitioner
redeem the same under the terms and conditions of the stock certificates

Petitioner filed a Motion to Dismiss private respondents' Complaint on the

following grounds: (1) that the trial court had no jurisdiction over the
subject-matter of the action; (2) that the action was unenforceable under
substantive law; and (3) that the action was barred by the statute of limitations
and/or laches.

Petitioner's Motion to Dismiss was denied by the trial court in an Order

dated March 16, 1979.4 Petitioner then filed its Answer on May 2, 1979. 5
Thereafter, the trial court gave the parties ten (10) days from July 30, 1979 to

3. What is/are the issue/s or
dispute/s in the said case or why
were those parties contending with
each other?
4. What were the arguments or
standpoint or reasoning of the parties
or persons contending in said case?
5. Give the brief decision or ruling of
the Supreme Court and explain briefly
why it is related to the topic.
submit their respective memoranda after the submission of which the case
would be deemed submitted for resolution.
On September 7, 1979, the trial court rendered the herein assailed decision
in favor of private respondents. In ordering petitioner to pay private
respondents the face value of the stock certificates as redemption price, plus
1% quarterly interest thereon until full payment, the trial court ruled:
Aggrieved by the decision of the trial court, petitioner elevated the case
before the SC essentially on pure questions of law.
a. Judge committed a grave abuse of discretion amounting to lack or
excess of jurisdiction in ordering petitioner to pay respondent
Adalia F. Robes the amount of ₱8,213.69 as interests from 1961 to
1979 on her preferred shares.
b. Respondent judge committed a grave abuse of discretion amounting
to lack or excess of jurisdiction in ordering petitioner to redeem
respondent Adalia F. Robes’ preferred shares for P8,000.00.
c. Respondent judge committed a grave abuse of discretion amounting
to lack or excess of jurisdiction in disregarding the order of the
central bank to petitioner to desist from redeeming its preferred
shares and from paying dividends thereon.
d. The trial court erred in not holding that the complaint does not
state a cause of action.
e. The trial court erred in not holding that the claim of respondent
Adalia F. Robes is barred by prescription or laches.
Whether or not the Republic Planters Bank, petitioner is compelled to
redeem the preferred shares and to pay the corresponding dividends to
Robes-Francisco Realty & Development Corporation.
The petitioner argues that it cannot be compelled to redeem the preferred
shares issued to the private respondent.
Because as per the Central Bank:
● they are experiencing chronic reserve deficiency, which indicates
that they are not allowed to do such redemption.
● and yung redemptive ay HINDI CUSTOMARY because of the
use na “may” (maaari). It is only OPTIONAL.
According to private respondent, they have the rights daw to collect
dividends sa preferred shares na ibinigay sa kanila ni petitioner (Bank) and
dapat daw ay i-redeem na ng petitioner ang shares na ‘yon as it is clearly
indicated sa terms and conditions sa stock certificate na ibinigay sa kanila -
- “That such preferred shares may be redeemed, by the system of drawing
lots, at any time after two (2) years from the date of issue at the option of
the Corporation”.
The instant petition, being impressed with merit, is hereby GRANTED. The
challenged decision of the respondent judge is set aside and the complaint
against the petitioner is DISMISSED
The present Corporation Code provides that the board of directors of a stock
corporation MAY DECLARED DIVIDENDS ONLY out of unrestricted
retained earnings. The Code, in Section 43, adopting the change made in
accounting terminology, substituted the phrase "unrestricted retained
earnings," which may be a more precise term, in place of "surplus profits
arising from its business" in the former law. Thus, the declaration of
dividends is dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be. Dividends are thus payable only when
there are profits earned by the corporation and as a general rule, even if there
are existing profits, the board of directors has the discretion to determine
whether or not dividends are to be declared.

And with Redemption, What the respondent judge failed to recognize was
that the redemption therefore is clearly the type known as "optional". The
terms and conditions set forth therein use the word "may". It is a settled
doctrine in statutory construction that the word "may'' denotes discretion,
and cannot be construed as having a mandatory effect.

The redemption of said shares cannot be allowed. As pointed out by the

petitioner, the Central Bank made a finding that said petitioner has been
suffering from chronic reserve deficiency, and that such finding resulted
in a directive, issued on January 31, 1973 by then Gov. G.S. Licaros of the
Central Bank, to the President and Acting Chairman of the Board of the
petitioner bank prohibiting the latter from redeeming any preferred share, on
the ground that said redemption would reduce the assets of the Bank to the
prejudice of its depositors and creditors.

Redemption of preferred shares was prohibited for a just and valid

reason. The directive issued by the Central Bank Governor was obviously
meant to preserve the status quo, and to prevent the financial ruin of a banking
institution that would have resulted in adverse repercussions, not only to its
depositors and creditors, but also to the banking industry as a whole.

● The directive, in limiting the exercise of a right granted by law to a

corporate entity, may thus be considered as an exercise of police
power.

RELEVANCE TO THE TOPIC:

Redeemable shares, on the other hand, are shares usually preferred, which
by their terms are redeemable at a fixed date, or at the option of either
issuing corporation, or the stockholder, or both at a certain redemption
price.A redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation.

The present Code allows redemption of shares even if there are no

unrestricted retained earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the corporation
cannot purchase its own shares except out of current retained
earnings. However, while redeemable shares may be redeemed regardless of
the existence of unrestricted retained earnings, this is subject to the
condition that the corporation has, after such redemption, assets in its books
to cover debts and liabilities inclusive of capital stock. Redemption, therefore,
may not be made where the corporation is insolvent or if such redemption
will cause insolvency or inability of the corporation to meet its debts as
they mature.
Other necessary information:

Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock
dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called for the purpose.
● These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but
a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to
pay interest before dividends are paid to common stockholders, is legal only when construed as requiring
payment of interest as dividends from net earnings or surplus ONLY.

Anent the issue of prescription, this Court so holds that the claim of private respondent is already barred by
prescription as well as laches. Art. 1144 of the New Civil Code provides that a right of action that is founded upon a
written contract prescribes in ten (10) years.
● The letter-demand made by the private respondents to the petitioner was made only on January 5, 1979, or
almost EIGHTEEN YEARS after receipt of the written contract in the form of the stock certificate.
● Laches has been defined as the failure or neglect, for an unreasonable length of time, to do that which by
exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right
within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned
it or declined to assert it.

Considering that the terms and conditions set forth in the stock certificate clearly indicate that redemption of the
preferred shares “MAY” be made at any time after the lapse of two years from the date of issue, private
respondents should have taken it upon themselves, after the lapse of the said period, to inquire from the petitioner
the reason why the said shares have not been redeemed.
● As it is, not only two years had lapsed, as agreed upon, but an additional sixteen years passed before the
private respondents saw it fit to demand their right.
● The petitioner, at the time it issued preferred shares to the private respondents in 1961, could not have
known that it would be suffering from chronic reserve deficiency twelve years later.
● Had the private respondents been vigilant in asserting their rights, the redemption could have been
effected at a time when the petitioner bank was not suffering from any financial crisis.